The BEST of Times …
The Greatest Money Machine – leasing, works on many levels here are two different perspectives not normally considered however are equally valid foundational supports for the intrinsic value a lease.
A real estate lease is the transfer of an interest for a time in place for consideration. The landlord gets rents and the tenant gets quiet enjoyment of the place for a certain time – term of lease, unless there are other extenuating circumstances like Rent control legislation in your City, in your Province/State.
What would you do, how far would you go (economically/financially speaking) to legally remove a stubborn (but compliant) tenant from your multi-unit residential building, within the guidelines of rent control legislation?
Several years ago there was a similar challenge, a landlord wanted to remove a tenant and deliver vacant possession to a new purchaser of the property.
The most efficient way to remove this tenant under the dome of protection they were afforded by Ontario’s Residential Tenancies Act, was to get mutual agreement and give enough money to get full buy in by the tenant. In hindsight it seems all parties got a good deal, our tenant negotiated through her lawyer that the landlord would pay her $15,000 so that she would sign a Termination Agreement and deliver vacant possession prior to or on the date of closing to our new purchaser. The landlord would also pay for all our legal expenses and luckily the tenant was using Legal Aid to represent her interests in this matter.
On closing the landlord received a vacant unit (broom swept – everything cleared out; chattels and garbage gone, that were not included in the APS) and the tenant received $15,000 and a mutual release against future liability.
The landlord/investor was able to close the transaction of sale of the property without breach of contract and the investment consequences as follows; sample investment numbers
Selling Price $272,500
– less : Cost of Sale (commission and legals) : $ 9,425
– less : Agreed Compensation to Tenant : $ 15,000
– less : Balance of mortgage ( interest only mortgage) : $ 62,500
less : other … : $ 0
Subtotal ……………………………………… : ($ 86,925)
Sale Proceeds Before Tax ………………………. $185,575
Original Equity Investment 8 years prior ………. $ 33,750
This amount should be deducted from the SPBT resulting in $ 151,825 .
Simple return on equity (BT) works out to be : $151,825 / 33,750 = 4.499
Therefore approximately 450 % growth over the eight years that works out to be approximately 56.25% annualized growth of capital (BT) and without the benefit of time value of money ( which we could do with the appropriate selection of a discount rate for the period in question.) The balance of these funds were re-invested in commercial income producing real estate within the same trading area which was not effected by the Residential Tenancies Act of Ontario.
So ultimately it was win – win, for the tenant and the landlord in the above situation.
Case Two The Stubborn Tenant in NYC :
Now the big juicy case of the real stubborn tenant who held out “For An Absolutely Insane Amount Of Money To Finally Leave His Rent-Controlled Apartment” in New York City’s 15 Central Park West. (March 7, 2014. Brian Warner)
If you have plans to remodel or redevelop a project into something more and you are challenged with a tenant who has no urgency to leave. Creative incentives may need to be negotiated to motivate this tenant to move out.
“Then there’s the story of Dr. Herbert J. Sukenik. Herbert held out for an absolutely insane amount of money to finally vacate his dingy 350 square foot Central Park apartment. It’s the most money ever paid to get a single tenant to leave an apartment in New York, possibly the world.”
In 1974, Dr. Herbert Sukenik [ a Ph.D. in physics from Cornell University], rented a tiny 350 square foot apartment in the Mayflower Hotel building located at 15 Central Park West and has lived there since.
In 2004 the real estate developers Arthur and Will Zeckendorf acquired for $401 million this great location with the obvious potential it presented to become a future luxury Condominium site. They quickly began putting into action their plans to initially motivate the current tenants to leave their units. The first round of incentives offered were $650,000, to move out. Many of the tenants happily accepted this first offer and left with the money. For the few remaining tenants the second round of incentives was an offer of $1 million to leave. Everyone left accepted this offer to vacate their units, with the exception of Dr.Herbert Sukenik. He said No.
Herbert was more creative as you are about to see.
“At first, Herbert offered to vacate his unit if the Zeckendorfs bought him a 2200 square foot, two bedroom apartment in a building nearby, then rent it back to him for $1 a month, for the rest of his life. The Zeckendorfs agreed. But then Herbert suddenly backed out. Herbert probably realized he was the lone holdout and these developers had very deep pockets. He demanded money. Lots and lots of money. Flabbergasted and unwilling to be held hostage, the Zeckendorfs began demolishing the building anyway. They hoped to drive Herb out from all the construction hassle and noise. Herbert was After living in a construction zone for over a year, Herbert’s stubbornness finally paid off in 2005. Admitting defeat, the Zeckendorfs caved and made an offer Herbert could not (and did not) refuse. In order to finally get Herbert to leave his decrepit 350 square foot apartment, they offered him a one time cash buyout of… get ready for it… $17 million. That is by far the most money ever paid to get a single tenant to leave a New York City apartment. It’s probably the most money ever paid to get anyone to leave any apartment. But it gets better. Not only did the Zeckendorfs agree to give Herb Sukenik $17 million cash, they also agreed to let him live in a $2 million apartment on Central Park South where he will pay $1 a month in rent for the rest of his life.”
A nice victory for Dr. Herbert Sukenik who played the cards the law dealt him skillfully and a win for the Zeckendorfs who were free to go forward with their business plans.
The Mayflower Hotel was completely remodeled as the Zeckendorfs invested one billion dollars into the property to convert it into a very high-end address in NYC.
The address “15 CPW“, as it is referred to locally, features a completely private driveway, a cinema and 14,000 square foot gym that has a 75 foot pool.
The prices for a one bedroom apartment average $7 million. Two bedrooms in the $12 million range, with the three bedrooms in the $15-$30 million range. Four bedrooms (only one available) $60 million and the five bedrooms, (only two available) $65 million and up… (2014, based upon availability and subject to change).
Who did well by leasing their space?
In the above cases both the tenant and landlord profited from having a valid lease agreement and the appropriate protection and there was enough financial gain to share some of it with the tenant(s) to gain their cooperation. This may be the appropriate solution when challenged with a good tenant in place to help move your bigger and more profitable real estate ideas forward. Only you along with your professionals can decide after doing a cost benefit analysis, it’s a case by case situation.
What is the long term economic value of leasing your premises? A real estate professional can help you determine the value relative to the market from time to time.
Check out our books: THE GREATEST MONEY MACHINE and SILVER BULLET INVESTING – both available from Amazon, http://www.booksforbusiness.com, OREA’s Real E Store at http://www.orea.com and TREB’s Realtor Store in Toronto, Canada.
The above is not meant to be legal, tax or engineering advice but information for discussion and educational purposes to assist investors and landlords considering their various options in conducting their real estate business and investments. We always recommend using an appropriate and competent professional in the area of interest.
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